What’s a trillion, or eleven, between friends?

Tuesday 31 July 2012

When reviewing the recently published “The Price of Offshore Revisited” by James S. Henry, I was reminded of some advice I was given many years ago from a dear friend, now passed on, which was taken from the Bible.

When reviewing the recently published “The Price of Offshore Revisited” by James S. Henry, I was reminded of some advice I was given many years ago from a dear friend, now passed on, which was taken from the Bible:-

“Test everything, Hold on to the Good.” (1 Thessalonians 5:21)

When testing any new insight I find it invaluable to follow the scriptural exhortation and to ask, what is the lens through which the originator sees the world, and what is their motivation?
A quick review of the paper and Mr Henry’s website and tweets reveal his starting point is ‘most clear’, as Hercules Poirot would have said. This can helpfully be illuminated by a few quotes from Mr Henry:-

“The very existence of the global offshore industry, and the tax-­‐free status of the enormous sums invested by their wealthy clients, is predicated on secrecy: that is what this industry really supplies as it competes for, conceals, and manages private capital from all over the planet, from any and all sources, no questions asked.”

No ambiguity there then, Mr Henry has clearly decided that offshore is populated by a bunch of crooks secreting away illicit capital on behalf of:-

“The key clients for the offshore system include the world’s wealthiest individuals and companies, as well as its worst villains. Numbering just a few million of the worlds 6.5 billion people, they are an incredibly diverse group, from 30-­‐year old Chinese real estate speculators and Silicon-­‐Valley software tycoons to Dubai oil sheiks, Russian Presidents, mineral-­‐rich African dictators and Mexican drug lords.”

More of Mr Henry’s view of the world is revealed in a recent tweet on the visit of Presidential hopeful Mitt Romney to the UK:-

Further research reveals that Mr Henry is a regular contributor to the USA publication ‘The Nation’ described by Wikipedia as:-

The Nation is the oldest continuously published weekly magazine in the United States. The periodical, devoted to politics and culture, is self-described as "the flagship of the left."[2] Founded on July 6, 1865, it is published by The Nation Company, L.P., at 33 Irving Place, New York City.[3]

So what we have here is not an independent researcher from a credible academic institution; but a left leaning employee of the Tax Justice Network, a tax lobbying organization with a pre disposition to advocating high tax and spend polices, wealth redistribution, punitive action against banks and the closure of ‘Tax havens” .

Turning specifically to the TJN paper, when all the arcane debates about methodologies and the failings of others in identifying the true size of assets held offshore is stripped away, TJN’s basic contention is that estimates of value at between $5trn and $12trn are too low, and the true figure is between $21trn - $32trn.

Given TJN contend this entire sum is the proceeds of corruption they recommend that the global community take action on “Pirate banking on the Rampage” and set about taxing these funds.
A few observations on the methodology and conclusions of the paper I believe are illuminating for anyone who wants to seriously test the veracity of this work:-

The TJN and their affiliates have a history of developing unproven ‘estimates’ of illicit capital flows, tax gaps and non disclosures which are routinely significantly higher than official sources.
An example would be the missing billions allegedly defrauded each year from developing countries by transfer mispricing. Work by leading tax experts has exposed that most of this value relates to China, and the underlying data is notoriously unreliable.

“There is a huge difference between the £35bn tax gap calculated by HMRC and the £120bn figure for the tax gap quoted by Tax Research UK. The scale of the difference has caused confusion and concern. Part of the reason for the disparity is that the two estimates are not directly comparable—partly because the definitions used are quite different. Nevertheless we think the £120bn figure is very misleading. It confuses the tax gap with cash flow and legitimate reliefs in a number of areas”

Whatever the debate about the size of the assets being managed from ‘offshore’ or International Finance Centres (IFCs) as they might be more appropriately titled, the reality is these centres are subject to the same laws, regulations and supervision by the international standard setting bodies as all other centres.

They manage and administer taxed capital on a tax neutral platform where beneficial ownership information is available to tax authorities in appropriate circumstances. Taxed capital is packaged and invested in IFC’s, the underlying economic activity it generates in the country of destination is also taxed. All that is avoided is a third layer of extra taxation in the IFC itself.
Funds transmitted to IFCs must pass tests on origination and undergo anti money laundering checks, which were recently found to be much more effective and robust than those undertaken by major global centres.
http://www.ifcforum.org/files/Sharman___Presentation.pdf

To contend that illicit capital could be hidden indefinitely in these centres without detection despite frequent inspections from the IMF, The World bank, the FATF and the OECD is fanciful and highly misleading.

Research designed to reinforce a deeply held prejudice is not in fact research at all; it is propaganda, constructed through the selective use of facts and the deployment of questionable data and assumptions.

Such a concoction amplified with exaggeration and dressed in raw speculation produces an emotive but misleading contention.

Perhaps the most spectacular admittance of how inaccurate this kind of estimation can be is contained in the range of estimate used, in this case a mere $11trn between the high and low estimate!

$11trn is equivalent to the GDP of China or around 60% of the entire US national debt. Some margin!

The real shame is this kind of propaganda does take people in, and is designed to do so. Narrow interest groups of this nature can only be sustained if they keep controversy alive, excite the media and motivate their donors to keep giving.

What is very sad is that through these shock tactics, principled faith and ethics based organisations are taken in by sleight of hand and recruited to advocate and fund lobbying activities which are highly politicised.

The language employed by TJN including in this paper is indicative of a degree of subjectivity which is incompatible with dispassionate research and reminds me of the quote by Ghandi:-

“I will not let anyone walk through my mind with their dirty feet.”

A passion for a cause is a commendable attribute, but if blind fundamentalism captures the individual there is an inevitable quest for ‘evidence’ to justify the obsessive prejudice. This quest quickly becomes self reinforcing.

Which takes me to my final quote:-

“Character is like a tree and reputation like its shadow. The shadow is what we think of it; the tree is the real thing." Abraham Lincoln.

Readers of ‘The Price of Offshore Revisited’ beware, TJN are chasing shadows of their own making.